Suppose that you have a three-year holding period. Your investment earns the fol

Question

Suppose that you have a three-year holding period. Your investment earns the following annual returns:

year 1: -4%

year 2: -3%

year 3: 2%

Suppose that you had invested $1,000 initially. During your holding period, you reinvest any cash payments such as interest and dividends back into this investment. What is the geometric mean annual return for your investment?

Do not round at intermediate steps in your calculation. Express your answer in percent. Round to two decimal places. Do not type the % symbol. If the geometric mean is negative, then include a minus sign.

Explanation / Answer

Return for year 1 = 1 - 0.04 = 0.96

Return for year 2 = 1 - 0.03 = 0.97

Return for year 3 = 1 + 0.02 = 1.02

Geometric mean of the return = (0.96*0.97*1.02)1/3 - 1 = 0.9830 - 1 = -0.017

Hence, answer is -1.70%

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